What is a cryptocurrency?

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In order to fully understand what cryptocurrencies are, we first need to understand what traditional fiat currencies are. Fiat money is basically a currency that a government has declared as legal tender, but it isn’t backed by a physical commodity like gold for instance. Fiat currency derives itself value from the constant change in supply and demand, rather than the value of the material that the money is made from. Before legal tender was declared as so called “money”, there was currency that was backed by physical commodities like gold and silver, and this relationship is what gave money its value. However, because fiat money nowadays isn’t linked to physical reserves, it is at risk of becoming worthless due to something called hyperinflation.

Cryptocurrencies have taken the world by storm over the past few years, and it has changed the way we conduct transactions online, with the use of cryptography and mathematical proof. Today the market cap of cryptocurrencies stands at over $500 billion, with nearly 1500 different cryptocurrencies in circulation. Cryptocurrencies are digital forms of currency that uses cryptography and mathematical proof for security. The use of cryptocurrencies actually make it easier and safer to transfer funds between individuals through the use of public and private keys. These public and private keys are generated after you obtain an address for the respective cryptocurrency of your choice, whether that be bitcoin, ethereum, ripple etc.

There have actually been previous attempts to make digital currencies during the 1990’s technology boom. Systems like Flooz, Beenz and Digicash all tried to undertake this mammoth task, but inevitably failed. The main reasons for their failure was down to things like fraud, financial problems, as well as varying opinions within the company’s themselves. What links all 3 of these companies, is that they all used the services of a trust third party to validate and verify transactions. This centralised way of validating transactions ultimately contributed to the downfall, because it mean that the payment network subject to authority by someone else, who was in control of all your money.

Fast forward to 2008 when Satoshi Nakamoto invented a way to build a decentralised digital cash system, and the by-product of this was Bitcoin. One major problem that was solved by creating decentralised digital cash was the double spending problem, which is the issue of spending the same amount twice. Usually a central server would keep records about balances, but in a decentralised network, there is no need for a server, but rather the nodes on the entire network all have copies of the public ledger to validate transactions.

If we scrape away everything to do with cryptocurrencies until we were left with the simplest form, we will find that they are nothing more than entries in a database, that no one can change without meeting certain conditions. They are nothing more than snippets of code belonging in a database, which represent value in the form of cryptocurrency, which we can send and receive. These cryptocurrencies have value, because collectively, we say that they have a certain level of intrinsic value. As this collective consensus has spread, it has opened the doors to businesses who now accept cryptocurrencies as an official form of payment in exchange for goods and services.